Hold Gujarat Gas; target of Rs 494: ICICI Securities

ICICI Securities research report on Gujarat Gas

Gujarat Gas (GUJGA) faces a tough choice: prioritise volume growth or maintain margins over the next 12 months. The conversion of about 55% of available units in its major consumption hub of Morbi to dual fuel use poses a challenge. GUJGA has already lowered prices in the region to remain competitive and margins in FY23 held up due to lower gas costs, increase in propane prices, and reduced volumes. However, we believe FY24E presents greater challenges as Asian LPG prices have dropped by a significant percentage from May to July 2023, affecting propane prices. These price changes may impact Q2FY24E pricing and pose material challenges for GUJGA. Pursuing volume growth may require a price reduction of Rs3-4/scm in Q2FY24E, which could significantly impact margins for the company in FY24E. Keeping in mind the equation between propane and LNG prices over the next 12-18 months, we believe downside risks to earnings are possible, and hence, now factor in some of these in our FY24/25E EPS.

Outlook

Revised EPS estimates are thus 21.6/13.1% lower vs previous estimates and TP also reduces to Rs494/sh (from Rs585). Downgrade the stock to HOLD (from BUY), with risk reward turning unfavourable at current levels.

For all recommendations report, click here